Citing high defense costs, fragile Iran ceasefire, Moody’s keeps negative outlook on Israel

Credit rating agency Moody’s decides to maintain a negative outlook on Israel’s country rating, leaving the door open for further rating cuts, as it warns about “higher defense spending and weaker economic growth” amid a “fragile” ceasefire with Iran.

The rating agency says the negative outlook reflects “downside risks…driven by very high geopolitical and security risks.” A lower rating raises credit costs for the government, businesses, and households.

“The implications of these risks for Israel’s fiscal and economic outlook could be more severe than we currently assess,” Moody’s states. “The recent opening of a direct military conflict with Iran will weigh further on Israel’s public finances.”

Moody’s says Israel’s Baa1 credit rating remains in place due to “Israel’s significantly weakened fiscal position as a result of the escalation in geopolitical risk since October 2023.”

“Despite ceasefires in place with Iran and Hezbollah in the north and a moderation of risks from the military conflict in Gaza, geopolitical and security risks remain significant and a source of downside credit risks for Israel,” Moody’s says. “At the same time, given Israel’s very strong market access, we expect debt to remain relatively affordable and for the government to have no problems meeting its funding needs.”

In September, Moody’s cut Israel’s credit score by two levels from A2 to Baa1, citing the “diminished quality of Israel’s institutions and governance” in their ability to manage state finances, and increased spending needs during the war period.